Long a purveyor of other companies' mutual funds, Charles Schwab & Co. plans to distribute its own funds through other brokerages beginning next year.
Schwab is holding "preliminary conversations" with other brokerage firms about making its proprietary portfolios available on their mutual fund supermarkets, said William J. Klipp, president and chief operating officer of Charles Schwab Investment Management Inc.
Such a move would mark a serious departure for Schwab, which sells about 140 families of mutual funds through its wildly popular OneSource supermarket. Schwab's own family of funds is available only to investors who hold an account with the firm, based in San Francisco.
Mr. Klipp said it is premature to identify any prospective vendors for the Schwab funds, which have $54 billion of assets under management. But the firm has not ruled out selling the portfolios through its direct competitors, such as Fidelity Investments' FundsNetwork program.
"We think they're good products, and if people want to buy them from other supermarkets, that's O.K. with us," he said.
Mr. Klipp said sales agreements with other brokerage firms should be in place within the first half of 1998.
Established in 1991, the Schwab family of funds is the 16th-largest fund complex in the United States, Mr. Klipp said. It includes 31 funds, and plans are under way for several portfolios to be launched early next year.
Banks that offer their own fund supermarkets could carry the Schwab funds, Mr. Klipp said. Indeed, one fund industry observer said a bank might be among the first to sign on to sell Schwab's portfolios.
"The first one that seems logical is NationsBank," said Geoffrey Bobroff, a consultant based in East Greenwich, R.I. In October, Schwab began helping Charlotte, N.C.-based NationsBank Corp. market two managed index funds, Mr. Bobroff said.
The deal followed by several months a spat between the two companies, touched off when a Schwab executive, John P. McGonigle, publicly criticized FundSolutions, NationsBank's nascent fund supermarket.
"We have not had any conversations with Schwab but we would certainly consider offering their funds through FundSolutions," said Belinda Sneddon, a vice president in product development with NationsBanc Advisors Inc.
Mr. Klipp said investors buying Schwab funds through third-party vendors would get the same product as Schwab brokerage customers.
Schwab funds that carry a transaction fee would be found in a transaction-fee supermarket, he said, and those that do not carry a fee would be carried by no-transaction fee marts, similar to OneSource.
"It's going to be a function of the fund," he said.
For example, Schwab's Asset Director Funds, which consist of three asset-allocation portfolios, could be included in a no-transaction-fee "OneSource type of program," Mr. Klipp said.
Mr. Bobroff said Schwab should have no trouble getting other brokerage firms to sell its funds. "Getting people to sign up to sell your funds is the easy part," he said.
Once Schwab starts distributing its funds through other marts, he said, it will need to negotiate revenue-sharing arrangements with its distributors. Schwab currently deals with that issue with the sponsors of funds its distributes through OneSource.
Mr. Bobroff said it will be interesting to find out whether Schwab's funds have a brand name in the marketplace. The company has not typically focused on product-specific advertising.
Mr. Klipp said Schwab has been mulling the outside distribution of its funds for some time but wanted to wait until it offered a broader array of products.
Separately, Schwab plans to launch three state-specific money market funds during the first quarter of 1998. Schwab's brokerage customers living in Florida, Pennsylvania, and New Jersey will be able to sweep dividends on stocks or mutual funds into money market funds, Mr. Klipp said.
Schwab may create equity funds next year, he said.
One possibility is an FTSE Tracker Fund, which would be a sterling- denominated fund for Schwab's investors in Britain, where the firm has a subsidiary Sharelink. The FTSE Fund would track the FTSE 100 index.
Two offshore funds are also under consideration, Mr. Klipp said. Schwab may launch a Non-Resident Alien Money Market Fund and a Standard & Poor's 500 Fund for offshore clients. The proposed funds might be registered in the Cayman Islands or in Dublin, Ireland, Mr. Klipp said.
